SF Chronicle: Union Calls for Closer Look at Finance Experts

UNIVERSITY OF CALIFORNIA

Union calls for closer look at finance experts

Tanya Schevitz, Chronicle Staff Writer

Friday, May 4, 2007

A University of California employees union is calling for closer scrutiny of the financial holdings of some outside experts who recommend how UC’s multi-billion dollar asset and retirement portfolios should be invested.

According to the union, some of the unpaid advisers to the governing Board of Regents have a financial stake in or a direct family connection to companies that manage hundreds of millions of dollars in UC investment accounts.

“The conflicts that (the union) has uncovered show that UC’s pension-governance policies are so lax that even fairly obvious conflicts are passing unnoticed,” said Faith Raider, a research analyst for the 19,000-member American Federation of State, County and Municipal Employees Local 3299. “What concerns us most is that UC’s lack of good governance policies might allow even more serious conflicts or other problems that have not yet been uncovered.”

Her local represents 19,000 service and patient-care workers at the UC campuses and medical centers, including custodians, food service workers and parking attendants.
The union identified two members of a seven-member investment advisory committee — John Hotchkis and David Fisher — who appear to have previously undisclosed connections to firms handling the university’s $66.5 billion pension, endowment and other funds.

Richard Blum, chairman of the Board of Regents and a member of the investment advisory committee, agreed that the disclosure issue should be looked into. It will be on the agenda of this month’s meeting of regents in San Francisco.
“I’m for as much disclosure as you can have,” he said. “It absolutely should be discussed. I think it is a legitimate issue.”
The advisory committee is made up of three regents and four outside experts who volunteer their services.

State law requires public officials, such as the 26 members of the Board of Regents, to fill out annual Statement of Economic Interest forms to identify financial interests. But UC’s unpaid advisers with no decision-making power do not have to fill out the form. Instead, they are asked to disclose existing and potential conflicts of interest in any way they want.
Hotchkis has served on the advisory committee about seven years, and David Fisher joined in 2004.

According to the union’s data, which The Chronicle confirmed, Hotchkis retains a 1.1 percent interest in his former firm Hotchkis & Wiley Capital Management, which was chosen in July 2004 to manage more than $430 million in UC equity funds.
Hotchkis was also sitting on the university’s advisory committee in 2005 when a firm headed by his daughter, Sarah Ketterer, was chosen to manage $311 million in non-equity funds. Ketterer is chief operating officer of Causeway Capital Management LLC.
Fisher, chairman of the board of Capital Guardian Trust Co., joined the advisory committee just months before his company was chosen to manage $377 million in fund assets. In its written bid for the contract, Capital Guardian listed Fisher as one of the seven portfolio managers who would work on the team managing UC’s funds.

Hotchkis and Fisher did not respond to requests for comment.

Of the four outside experts on the committee, only Hotchkis provided UC with a letter listing investments in common with the university.

He filed the letter in 2002 and has not updated it, as required under UC policy if there are any changes. His disclosure did not include his stake in Hotchkis & Wiley or his family connection to Causeway Capital.

Fisher did not file any disclosures, nor did the other two outside experts — William Hambrecht, founder, chairman and CEO of WR Hambrecht & Co., and Charles Martin, a retired investment executive.

While state law requires that the committee members abstain from participating in discussions or voting on matters that might financially impact them or their family, UC spokesman Michael Reese said no such conflicts exist because the outside advisers do not make decisions about UC investments and are not involved in the selection of external fund managers. The seven-member board merely advises the Board of Regents on general investment policies, strategies and procedures, he said.

Reese said the governing board will nonetheless consider an item at their meeting in San Francisco this month to “clarify disclosure and conflict” policies related to the investment advisory committee members.

“As with other areas of university policies related to its operations and oversight, there is always room to improve guidelines about disclosure and conflicts of interest to ensure public trust, accountability and transparency,” Reese said. “We must always be diligent about real and apparent conflicts of interest, in all aspects of university operations.”

Kirk Hanson, a professor and executive director of the Markkula Center for Applied Ethics at Santa Clara University, said there should be a standard form for the members to fill out and that they should orally disclose any conflicts every time the issue comes up in discussion.

It is not unexpected that such experts would have potential conflicts. “It is not necessarily a bad thing as long as there is full disclosure,” Hanson said. “In this kind of board, disclosure is the disinfectant that will protect the public interest.”